The inflation slowdown in Canada means rates may have reached their peak already

The significant decline in February’s headline inflation means that interest rates may have reached their peak already and the next change will be a reduction.

At least, according to ING’s Chief International Economist James Knightley, who points to the second consecutive month of annual inflation rate showing a surprising slowdown.

The latest report by Statistics Canada says the consumer price index slowed to an annual rate of 5.2% last month, marking the strongest deceleration since February 2020. It’s lower than January’s 5.9% and slower than the 5.4% rate predicted by a Bloomberg poll of economists.

Most economists suggest that the inflation slowdown almost guarantees one more no-rate change decision from the central bank on April 12.

However, some experts, like Knightley, expect at least one 0.25% rate cut before the end of 2023, especially amid today’s global banking turbulence. That would reduce the BoC’s key lending rate from 4.5% to 4.25%.

“In our opinion, the Bank’s next rate change will be a cut, most probably before the year-end,” -Knightly noted. “Canada’s stronger exposure to rate increases due to dominance of variable rate borrowing means consumer activity should slow down in 2023.”

Moreover, higher household debt levels in Canada (more than 180% of disposable income compared to 103% in the U.S.) mean Canada is “particularly vulnerable to the risk of a real estate market correction in a growing interest rate environment.”

“Falling inflation rates will provide the central bank with a possibility to react with looser monetary policy, especially as the Finance Minister Chrystia Freeland pointed to ‘fiscal restraint’ in the next budget aimed at restraining the inflation,” – Knightly says.

 

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